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What Are the Tax Implications of Owning More Than One Limited Company?



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As a small business owner, you might be thinking about expanding your operations or diversifying your investments by setting up a second limited company.


However, what many business owners don’t realise is that owning more than one limited company can affect how much Corporation Tax you need to pay.


This article will explain the tax implications of owning multiple companies in simple terms, so you can make informed decisions for your business.


Corporation Tax in the UK: A Quick Overview

Before diving into the tax rules for owning more than one company, it’s important to understand the basics of Corporation Tax. This is the tax that limited companies pay on their profits.


As of April 2023, the UK has two main Corporation Tax rates:

  • Main Rate (25%): For companies with profits over £250,000.

  • Small Profits Rate (19%): For companies with profits of £50,000 or less.

  • For profits between £50,000 and £250,000, there’s a marginal rate, where your company pays a combination of the two rates.


However, if you own more than one company, these thresholds might shrink. This is where things get a little more complicated.


What Happens When You Own Multiple Companies?

When you own more than one limited company, HMRC sees this as a potential way to split profits and reduce your tax bill. To prevent this, they apply what are called associated companies rules. Although this term may sound technical, it simply means that if you have more than one business under your control, the tax thresholds are divided between them.


Key Idea:

  • The more companies you own, the smaller your tax-free allowance and threshold for the lower tax rate will be.


How Does This Affect Corporation Tax?

Let’s look at how these rules change the Corporation Tax you’ll pay if you own more than one company.


If you have one company, the tax thresholds work like this:

  • Profits up to £50,000 are taxed at the Small Profits Rate (19%).

  • Profits over £250,000 are taxed at the Main Rate (25%).

  • For profits between these amounts, you pay a mix of both rates.


However, when you own multiple companies, these thresholds are split between them. The more companies you own, the lower the threshold for each one.


Example 1: Owning Two Companies

Let’s say you own two companies. In this case, the Corporation Tax thresholds are cut in half:

  • The Small Profits Rate applies up to £25,000 for each company (instead of £50,000).

  • The Main Rate starts at £125,000 (instead of £250,000).

Now imagine:

  • Company A makes a profit of £40,000.

  • Company B makes a profit of £20,000.


Normally, Company B would be taxed at 19%, but because both companies are under your control, the £50,000 limit is now divided between them. So, Company A's profit over £25,000 is subject to a marginal rate of tax.


Example 2: Owning Three Companies

If you own three companies, the thresholds are divided further. Now, each company only gets one-third of the standard allowances:

  • The Small Profits Rate applies up to £16,666 for each company.

  • The Main Rate starts at £83,333 for each company.


If your total profits across the three companies are more than these thresholds, you will start paying the higher rate of Corporation Tax (25%) sooner than you would with just one company.


Why Does HMRC Do This?

The idea behind these rules is to prevent business owners from creating multiple companies to artificially split profits and take advantage of the lower Corporation Tax rate for each one. By dividing the thresholds between all the companies you control, HMRC ensures that businesses still pay a fair rate of tax on their total profits, regardless of how those profits are spread across different companies.


Exceptions and Special Circumstances

There are situations where HMRC might not count all your companies when dividing the tax thresholds:

  • Dormant Companies: If one of your companies is dormant, it may not be included.


However, in most cases, if you control multiple companies, the thresholds will be shared between them.


How to Know If Your Companies Are “Associated”

Here’s a simple checklist to help you understand if your companies are considered associated:


  1. Direct Ownership: Do you own or control more than one company? If yes, these companies are likely associated.

  2. Family Connections: If family members (such as your spouse or children) own companies that you are involved in, these businesses might also be linked.

  3. Group Structures: If your companies are part of a group or share ownership, they could be connected for tax purposes.


What Should You Do?

If you’re thinking of setting up a second company, it’s important to be aware of these tax implications. The associated companies rules can make a significant difference to how much tax you’ll pay.


Here are some steps you can take:

  • Review your company structure: Understand how your businesses are connected and whether the associated companies rules apply to you.

  • Plan your profits wisely: Be aware that the more companies you control, the sooner you’ll start paying higher Corporation Tax rates on your profits.

  • Seek professional advice: Getting advice from an accountant can help you navigate these rules and make the most of any available tax reliefs.


Final Thoughts

Owning more than one limited company can be a smart way to expand your business or diversify your investments, but it’s important to understand how it affects your tax bill.


The more companies you control, the lower your Corporation Tax thresholds will be, meaning you may start paying higher rates of tax sooner.


If you’re unsure how these rules apply to your business, or if you need help structuring your companies in the most tax-efficient way, consulting a tax expert can help you avoid costly surprises and maximise your profits.


By being aware of the associated companies rules, you’ll be in a better position to manage your tax responsibilities and make informed decisions about your business’s future.

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